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Friday, 11 December 2015

Emergency Fund – A Friend in Need

Emergency Fund – A Friend in Need

My friend lost a job. I know he
will get his job eventually, but the good thing is that he was saving for his
rainy days. And for the time period he will not be working, he can meet his
needs from that fund.

Life is extremely uncertain. One
day it gives us all the happiness in world and one day we are in deep trouble.
To keep us emotionally strong in testing waters, Emergency fund is extremely
important. Let’s understand its true purpose. If we have saved for emergencies/contingencies
in life, then there is no need for us to fret about our monthly expenditure,
which will be there in whatever situation we are in.

Now the next question arises. How
much of emergency fund is enough? We are in some situation, and we don’t know
for how long that situation will continue. Normally one should have 6 months
expenses for this fund. And if your house expenses are variable in nature, you
can always target for 6 months’ salary. This gives us enough buffer and we can
focus on making our situation better.

Where should we save this money?
Definitely not CASH AT HOME. Keeping money at home is making that money easily
accessible for any purpose, and we tend to spend it for all other things other
than emergencies plus it will not give us any return. You also cannot put that
money in Stock Market, which is extremely volatile in nature. What will happen
if you need the money and markets are down, and your savings are in negative
numbers? Emergency fund is not for investing in risky instruments. And you
should also not put this money in instruments with lock-in period like –
Insurance, PPF. You can keep this money at your Bank in sweep-in account or
even in Cash mutual funds which provides you enough liquidity to take the money
out when needed.

Charu Hastir, CFPCM is founder member of www.theriteplan.com. Rite plan is an online financial planning
portal created to achieve a single objective of providing easy and Do It
Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun
Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/